Putting the yuan in the International Monetary Fund’s Special Drawing Rights (SDR) basket has become more of a political rather than an economic battle between China and the United States. The SDR basket is a virtual currency based on a basket of currencies reviewed every five years. Its value is largely symbolic as it is designed to be used as a currency in emergencies such as during political turmoil and natural disasters. In terms of immediate impact, the direct benefit from having its currency in the SDR basket is small for China. Global reserve investment mangers may increase their exposure to Chinese assets by up to US$30 billion if the yuan is included in the basket. But that’s small when compared to the size of the entire global reserve portfolio, which currently stands at US$12 trillion, according to a research report by Aidan Yao at AXA Investment Managers. However, Beijing seems to believe the inclusion could trigger a significant reweighting of the entire global reserve portfolio. To increase the odds of a favourable outcome, China has already started exerting political pressure on the IMF and has initiated a diplomatic campaign to win support for the renminbi. International Monetary Fund chief Christine Lagarde stated recently that “it is not a question of if, but when (the renminbi is included in the SDR)”. “We think what eventually determines the renminbi’s fate at this year’s review will likely be a political decision,” said AXA’s Yao. “We see a greater-than-ever chance for the renminbi to be included in the SDR later this year.” SDR review occurs every five years, with the next one due later this year. The review consists of two parts: a technical assessment and a final vote by the IMF board. Because of China’s capital account restrictions, less than one per cent of global reserve assets are invested in renminbi-denominated assets. The currency also has yet to play a major role in international lending through banks and bond markets. As for the actual voting, different member countries at the IMF have different levels of voting power, with the United States currently enjoying the most, with 17 per cent of the total. The decision to include the yuan in the SDR would only require 70 per cent of the vote. Yao said China’s diplomatic momentum has gathered steam in recent years with strengthened financial ties with other countries through a growing number of offshore renminbi centres, central bank swap lines, cross-border investment programmes and the establishment of the Asian Infrastructure Investment Bank. UBS economist Wang Tao expressed a similar view. “Given the insignificance of the SDR issue for most member countries and China’s open expression of interest, we think many of them would likely see greater economic/political pros than cons from voting ‘yes’ to the yuan’s inclusion this year or soon thereafter – especially given China’s increasing importance as a trading partner for most countries,” Wang said.